A financial representative is delivering a training module on secondary market structure, contrasting traditional exchange-listed trading venues with over-the-counter (OTC) trading. Which of the following statements correctly describe the structural and operational characteristics of these trading venues? (Select TWO correct answers.)
- Exchange-listed venues function primarily as centralized auction markets, whereas the OTC market operates as a decentralized, negotiated inter-dealer network.Answer
- Market makers in the OTC market stand ready to buy and sell securities for their own accounts, acting in a principal capacity.Answer
- CSecondary market transactions executed in the OTC market generate net sales proceeds that are paid directly to the issuing corporation.
- DWhen an OTC market maker executes trades directly with retail clients from its inventory, it acts as an agent and charges a commission.
Answer
The correct statements are that exchange-listed venues function primarily as centralized auction markets while the OTC market operates as a decentralized negotiated network, and that OTC market makers trade for their own accounts in a principal capacity.
Exchange-listed markets bring buyers and sellers together in a centralized venue operating as an auction market. In contrast, the over-the-counter (OTC) market is an unlisted, decentralized network where market makers compete by publishing bid and ask quotes, acting as principals (dealers) who trade out of their own inventory.
Step-by-Step Solution
Key Concept
Secondary Market Venue Structures: Centralized Exchange Auctions vs. Decentralized OTC Negotiated Markets
Estimated Time:1m 15s